Quick Assets – Overview, How To Calculate, Example

It is readily convertible into cash, such as a marketable security, a note, or an account receivable. Current assets are examples of quick assets, which are expected to be converted to cash, sold, or consumed during the next twelve months. These assets are important for a business to have because they can be used to pay off debts or invest in new opportunities. The quick ratio communicates how well a company will be able to pay its short-term debts using only the most liquid of assets.

For instance, a quick ratio of 1.5 indicates that a company has $1.50 of liquid assets available to cover each $1 of its current liabilities. An “acid test” is a slang term for a quick test designed to produce instant results. The quick ratio is calculated by dividing most liquid assets or current assets by the current liabilities. The types of quick assets are cash and equivalents, accounts receivable, and marketable securities. They can also provide businesses with a cushion against short-term financial instability.

Inventory can be quite difficult to convert into cash in the short term, and so is generally not available for paying off current liabilities. Current assets are included in the current ratio, which compares current assets to current liabilities. The inventory differential carries over into this ratio, which is not as useful as the quick ratio for determining the short-term liquidity of a business. The quick ratio measures the dollar amount of liquid assets available against the dollar amount of current liabilities of a company.

Components of the Quick Ratio

He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Let’s take an example to understand the calculation self-employment tax of Quick Assets in a better manner. Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.

  • Current assets comprise cash, cash equivalents, prepaid liabilities, expenses, inventory, short-term investments, and other liquid assets.
  • The “quick “ term in quick assets signifies how quickly or rapidly it can be converted into cash.
  • Conversely, a business in difficult circumstances may have no cash or marketable securities at all, instead fulfilling its cash requirements from a line of credit.
  • Quick assets are part of current assets, which are subtracted from current liabilities to calculate working capital.
  • The total accounts receivable balance should be reduced by the estimated amount of uncollectible receivables.

Though a company may be sitting on $1 million today, the company may not be selling a profitable good and may struggle to maintain its cash balance in the future. There are also considerations to make regarding the true liquidity of accounts receivable as well as marketable securities in some situations. Cash equivalents are generally an extension of the cash, which includes investments with low risk and high liquidity. This can sometimes be treasury bills, commercial papers, bank deposits, etc.

Real-Life Example of Quick Assets

Regardless of which method is used to calculate quick assets, the calculation for current liabilities is the same as all current liabilities are included in the formula. The quick ratio indicates the company’s capacity to deal with any emergency. A company should balance its quick and current assets for perfect management and efficient operations.

A high quick ratio is an indication that a company is utilizing its short-term assets effectively to meet its financial needs. This is primarily because quick assets are used in the computation of the quick ratio. The quick ratio is an important measure because the credit rating and reputation of a company can suffer if it is not able to meet its financial obligations. This is important to know because it will affect how you calculate your company’s quick ratio. Now that you know how to calculate the quick ratio, you can start using it to analyze companies. Just remember to keep in mind that the quick ratio is just one tool in your financial analysis toolbox.

The quick ratio’s current assets and liabilities give a more accurate picture of a company’s financial health than the current ratio. When it comes to financial analysis, the quick ratio is an important metric to consider. This ratio provides insights into a company’s short-term liquidity, or if it can pay off its short-term obligations. It is important to note that inventories don’t fall under the category of quick assets. The only way a business can convert inventory into cash quickly is if it offers steep discounts, which would result in a loss of value. It’s relatively easy to understand, especially when comparing a company’s liquidity against a target calculation such as 1.0.

Definition of Quick Asset

There is often a fine line between balancing short-term cash needs and spending capital for long-term potential. The higher the quick ratio, the better a company’s liquidity and financial health, but it important to look at other related measures to assess the whole picture of a company’s financial health. Quick ratio signifies the internal management of the company and the external investor. Accounting standards require companies to report valuation of these kinds of assets. This article explains what quick assets are, their main types, and how to calculate them. Conversely, a highly stable business with predictable cash flows requires far fewer quick assets.

A company’s capacity to satisfy its immediate financial obligations is shown by its quick assets, sometimes called liquid or current liquid assets. On the balance sheet, deduct prepaid expenses from current assets to arrive at quick assets. Cash on hand, short-term investments, and accounts receivable are a few examples of fast assets. Sometimes a well-established business may go through unpredicted cash flow issues.

FAQs About Quick Assets

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.

Quick assets allow a company to have access to its current ratio of working capital for daily operations. On the same note, the accounts receivable should only consist of debts that can be collected within a 90-day period. Publicly traded companies generally report the quick ratio figure under the “Liquidity/Financial Health” heading in the “Key Ratios” section of their quarterly reports.

More from Merriam-Webster on quick assets

This shows that, disregarding profitability or income, Johnson & Johnson appears to be in better short-term financial health in respects to being able to meet its short-term debt requirements. The Quick Asset ratio, also known as the Acid-Test ratio, is calculated by dividing quick assets (cash and cash equivalents, marketable securities, and accounts receivable) by current liabilities. GAAP requires that current assets or quick assets be separated from long-term assets on the face on the balance sheet. This gives investors and creditors insight as to how liquid the company is.